Industry Week in Review – March 10, 2017

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Aerospace & Defense Update

To end the current continuing resolution (“CR”), which has put new-start defense procurements on hold, the United States House of Representatives voted 371-48 to pass a $578 billion defense bill for GFY2017.  The spending bill includes $516.1 billion in the base budget and $61.8 billion in overseas contingency operations (“OCO”).  If ultimately passed, it would increase funding for the troubled F-35 program by $1.2 billion and increase funding for the F-18 by ~$1.0 billion.  The Navy would also benefit by receiving an additional $1.6 billion for a new amphibious ship.  The bill will now move to the Senate where it is expected to be met with some resistance from Democrats who are expected to want to evaluate the defense bill in the context of other non-defense budgets.

Heli-Expo was held from March 7th to March 9th in Dallas, TX and hosted over 20,000 industry professionals from around the world who visited 700+ exhibitors.  With over 1 million square feet of exhibit space, the conference included a display of over 60 helicopters.  In advance of the conference, Honeywell released its updated rotorcraft delivery estimates which decreased last year’s forecast by ~400 units. Honeywell is now forecasting 3,900 to 4,400 civilian use helicopters will be delivered from 2017 to 2021.  However, even with this news, the atmosphere at the Heli-Expo conference was still filled with high energy and excitement for the industry.

Government Technology Solutions Update

KeyW Corporation agreed this week to acquire Sotera Defense Solutions, Inc. from global asset management firm, Ares Management, L.P, for approximately $235 million.  This acquisition is highly strategic as it will nearly double KeyW’s size.  At the end of 2016, KeyW employed 1,000 people and had $288 million in revenue and Sotera will add another 1,100 employees and a projected $225 million of revenue in 2017.  Sotera was attractive to KeyW given its contract mix, high-profile customer base, and unique, high-end technical capabilities.  Approximately 80% of Sotera’s revenue is derived from prime contracts, driving KeyW’s prime revenue mix up to 67% from 58%.  In its investor presentation, KeyW noted that Sotera also provides KeyW with a stronger foothold in the Intelligence Community (“IC”), as well as across the Department of Defense (“DoD”).  KeyW, which has historically served 25% of the IC’s agencies, will now have access to 60% of its agencies.  The combined company will also have enhanced cyber security, cloud computing, big data, analytics, machine learning, artificial intelligence, and agile development capabilities.  The deal is expected to generate $7 to $10 million of long-term synergies via consolidated facilities and IT infrastructure and is expected to close by the end of June.

On Monday, Microsoft announced that it would expand its Azure Government Cloud offerings with the addition of two products, Power BI Pro and HDInsight.  The latter is an open-source platform which enables its users to more easily and efficiently create powerful big data analytics solutions, applying machine learning capabilities to process large amounts of data in real-time.  Power BI Pro is a cloud-based data visualization suite capable of tracking real-time or interactive changes in data.  In addition to Power BI Pro and HDInsight, the expanded Microsoft Azure Government suite would also include Cognitive Services, allowing for voice, facial, and emotional recognition.  Industry insiders believe that the ability to analyze, visualize, and stream large amounts of data in real time has great innovative potential, and may allow for significantly increased efficiency and speed with which functions can be carried out.

Big Movers

Bombardier (down 15.2%) – Share prices were down this week after Bombardier officials suspected of bribery were arrested in Sweden.

KeyW (down 8.3%) – Share prices were down this week after the Company announced disappointing 4Q16 earnings.

Transactions

CeramTec GmbH has agreed to acquire Morgan Advanced Materials plc’s UK Electro-Ceramics Business, a provider piezo and dielectric ceramic products used in a wide range of industrial, electronics, medical, and defense applications.  The deal is worth an estimated $57.3 million.

HEICO Corp. has agreed to acquire Air Cost Control SAS, a provider of connectors, wire, cable, protection, and fastening systems.  Terms of the deal were not disclosed.

KeyW Corporation has agreed to acquire Sotera Defense Solutions, Inc., from Ares Management, L.P., a provider of technology-based systems and solutions, including cyber security, big data analytics, machine learning, artificial intelligence, and data visualization, primarily for the IC and DoD.  The deal is worth an estimated $235 million.

Leonardo S.p.A has agreed to acquire Daylight Solutions, Inc., a provider of quantum cascade laser products and technology.  The deal is worth an estimated $150 million.

Rockwood Equity Partners, LLC has acquired Ibis Tek, LLC, a provider of transparent armor and accessory products for tactical and combat vehicles.  Terms of the deal were not disclosed.

Samuel, Son and Co., Ltd. has acquired Burloak Technologies, Inc., a provider of additive metal and plastic components for aerospace, defense, and commercial high-tech companies.  Terms of the deal were not disclosed.

West Star Aviation, LLC has acquired Avant Aerospace, Inc., a provider of Dassault Falcon Jet spares and equipment.  Terms of the deal were not disclosed.

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Industry Week in Review – March 3, 2017

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Aerospace & Defense Update

According to a White House official, President Trump’s upcoming budget proposal for GFY2018 will increase the defense budget by $54 billion to $603 billion, a ~10% increase over the spending levels set in the Budget Control Act.  This proposed amount is a relatively modest ~$18 billion more than the amount former President Obama had proposed in his final budget.  Trump proposed budget cuts, notably to the State Department, to offset this defense spending increase.  A portion of Trump’s budget proposal will be submitted to Congress in a few weeks, but the final budget proposal is not expected to be completed until early May.  In addition, Trump is expected to request another $20-$30 billion in defense spending this month for the remainder of GFY2017.  The Federal government is currently operating under a Continuing Resolution and will need to finalize their spending bills for GFY2017 by April 28th.

According to the Congressional Budget Office, the U.S. Navy’s 2017 shipbuilding plan, submitted to Congress last July, will cost ~$566 billion over a 30-year period, as the Navy aims to increase its fleet from 272 ships to 308 ships.  After factoring in the current ship retirement plans, 254 ships must be built over the next 30 years in order to reach the Navy’s target of 308 ships.  According to this proposed plan, seven ships will be built in 2017, 38 ships between 2017 and 2021, and 216 ships between 2022 and 2046.  The Navy plans to build 56 new submarines, which will consume a majority of the shipbuilding budget due to the high costs of building submarines capable of firing nuclear missiles.  This proposed increase will cost ~$19 billion a year, a 36% increase over the historical average that the Navy typically spends.  However, the Navy recently indicated that it has increased its’ target goal of 308 ships to 355 ships in anticipation of Trump’s campaign promise to build a 350-ship naval fleet.

Government Technology Solutions Update

Late last week, the Department of Defense (“DoD”) launched a new collaborative, open-source software development website called code.mil.  The website was created to promote further collaboration between the public and private sectors.  The only requirement for this new site is that potential private developers would read and agree to a document called the Defense Open Source Agreement (“DOSA”), and submit a signed-off Developer’s Certificate of Origin whenever they make a contribution to something on the site.  The DOSA is what allows the Federal government to make their projects open source. Work completed by Federal employees cannot normally be patented, and thus cannot be collaboratively developed in an open source format.  However, by using the DOSA to establish a contractual framework between themselves and private developers, the DoD is able to form a relationship that allows for open-source development.  Many insiders in the private sector have praised open-source methods for leading to increased efficiencies and innovation in the development and improvement of software projects.

The Defense Information Systems Agency (“DISA”) recently issued requests for proposals (“RFPs”) for its 10-year, $7.5 billion Systems Engineering Technology and Innovation (“SETI”) contract.  SETI will be a multiple award task order contract (“MATOC”), and is designed to be complementary to procurements made via DISA’s other major upcoming indefinite delivery / indefinite quantity (“IDIQ”) contract, ENCORE-III.  According to DISA, SETI will be used to “provide complex IT engineering required to design, develop, and deliver new DISA and DoD-provided IT capabilities.” The plan would be to initially develop and implement new IT solutions using SETI, and then provide for the maintenance of those new systems through ENCORE.  More specifically, SETI would be used to address higher-level technical issues, including systems engineering, design analysis, and systems architecture, among others.  The contract is initially slated to use a best value tradeoff method for procurement, and in terms of competition will have both a small-business pool as well as a full and open pool.

Big Movers

 Aerojet Rocketdyne (up 11.7%) – Share prices were up this week after the Company completed its acquisition of Coleman Aerospace from L3 Technologies.

 Meggitt (up 9.3%) – Share prices were up this week after the Company beat profit expectations.

 Transactions

Defense and Government Solutions has acquired Ti-Nanotech, a provider of titanium plating for end products within the aerospace, defense, and commercial sectors.  Terms of the deal were not disclosed.

Jabil Circuit, Inc. has acquired Lewis Engineering, Inc., a provider of aerospace products, turbine engine components, and industrial pumps.  Terms of the deal were not disclosed.

Veritas Capital has agreed to acquire the Capital Services Business of Chicago Bridge and Iron’s (“CB&I”) Capital Services business, a provider of comprehensive and integrated maintenance services, environmental engineering and remediation, program management, and disaster response and recovery services.  The deal is worth an estimated $755 million.

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Industry Week in Review – February 23, 2017

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Aerospace & Defense Update

After Retired Vice Admiral Bob Harward turned down President Trump’s offer to be National Security Advisor, the President selected Lieutenant General Herbert Raymond (“H.R.”) McMaster to replace Retired Lieutenant General Michael Flynn.  Ret. Lt. General Flynn resigned amid reports he communicated with Russian officials and could be vulnerable to blackmail.  Lt. General McMaster has served in the military since 1984 and was most recently the Director of the Army Capabilities Integration Center in Fort Eustis, VA.  General McMaster is well known for his book, Dereliction of Duty, in which he criticizes military leadership during the Vietnam era for giving in to powerful civilian officials such as President Johnson and Defense Secretary Robert McNamara.  He believes this caused the U.S. to not have a cohesive strategy in the Vietnam War.

This week, Airbus disclosed it is looking to renegotiate government contracts linked to its troubled A400M program, which is billions of euros over budget and years behind schedule.  In 2016, €2.2 billion in charges from the program was the main driver for companywide net income falling 63% for the year.  Over the last ten years, Airbus has faced ~€7.0 billion in charges in order to correct for unanticipated redesigns and problems with suppliers.  Airbus’ woes stem from back in 2003 when the Company agreed to absorb most of the development risk associated with the airplane, which is unusual in military aviation contracts.  Currently, Airbus has 174 total orders for the aircraft, but will need to win more orders to make the program profitable.

Government Technology Solutions Update

Secretary of Defense James Mattis recently issued a memo in which he described his desire for a review of some of the Pentagon’s business practices.  This was done in order to see if there were any ways in which the Department of Defense (“DoD”) could improve the efficiency with which it conducts business.  According to Mattis, some of the initial areas of focus in this review center on, among others, logistics and supply chain management and cyber and information technology management.  Some in the industry think that Mattis could potentially use this opportunity to drive innovation in the technical capabilities of the DoD.  Mattis’ memo was not entirely comprehensive in terms of exactly what measures will be taken.  Until a more thorough review of the Pentagon’s policies is completed, it remains to be seen what initiatives the DoD will take to modernize and improve efficiencies in its IT and cyber infrastructure.

Canada-based MacDonald, Dettwiler and Associates (“MDA”) has agreed to acquire DigitalGlobe, Inc., a provider of Earth-imagery products and services.  According to the terms of the deal, the acquisition will consist of $2.4 billion in cash and equity, as well as the assumption of approximately $1.2 billion in net debt, for a total enterprise value of $3.6 billion.  This acquisition is part of MDA’s strategy to increase its market share in the United States, and would substantially increase its presence in the Intelligence Community (“IC”).  DigitalGlobe’s satellite imaging, satellite constellation, and geospatial analysis offerings provide a variety of intelligence, reconnaissance, and analytics services to the Federal government.  Additionally, DigitalGlobe acquired The Radiant Group in October of 2016 for roughly $140 million.  That deal provided it with an expanded presence with customers such as the National Reconnaissance Office (“NRO”), the National Geospatial-Intelligence Agency (“NGIA”), the Defense Intelligence Agency (“DIA”), and U.S. Special Operations Command (“SOCOM”).  MDA hopes to leverage both DigitalGlobe’s high-end technical capabilities, as well as it’s valuable customer base, as it continues its push to expand further into the American marketplace.

Big Movers

MacDonald, Dettwiler and Associates (down 10.7%) – Share prices down this week after the Company agreed to acquire Digital Globe for $3.6 billion.

Emcor (down 10.9%) – Share prices were down this week after the Company missed 4Q profit forecasts.

Transactions

Aerojet Rocketdyne Holdings, Inc. has agreed to acquire Coleman Aerospace, a provider of suborbital launch vehicles, payloads, and launch services.  The deal is worth an estimated $15 million.

BAE Systems, Inc. has acquired IAP Research, Inc., a provider of electromagnetic metal forming technology, magnetic processing of metals and ceramic powders, and electrical and mechanical engineering solutions.  Terms of the deal were not disclosed.

Gooch & Housego plc has acquired StingRay Optics, LLC, a provider of high performance optical and opto-mechanical subsystems for demanding defense and commercial applications.  The deal is worth an estimated $10 million.

Gowanda Components Group has agreed to acquire Microwave Circuits, a provider of microwave components for commercial and military applications.  Terms of the deal were not disclosed.

MacDonald, Dettwiler and Associates Ltd. has agreed to acquire DigitalGlobe, Inc., a provider of high-resolution Earth-imagery products and services sourced from its own advanced satellite constellation and third-party providers.  The deal is worth an estimated $3.6 billion.

STG Group Inc. has agreed to acquire Preferred Systems Solutions Inc., a portfolio company of CM Equity Partners, and a provider of information technology, engineering, program management, intelligence, and staffing solutions to Federal government clients.  The deal is worth an estimated $119 million.

TransDigm Group, Inc. has acquired Takata Corp., Aerospace Business, a provider of specialty technical restraints covering Airbus and Boeing platforms.  The deal is worth an estimated $90 million.

 

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Industry Week in Review – February 17, 2017

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Aerospace & Defense Update

Two days before President Trump’s visit to Boeing’s South Carolina facility for the debut of Boeing’s 787-10 Dreamliner aircraft, 74% of the workers at the facility voted against unionization.  Union organizers with the International Association of Machinists and Aerospace Workers were unsuccessful in their efforts to unionize the workforce.  Workers in Boeing’s South Carolina facility currently earn ~1/3 less than unionized counterparts.  The Company began manufacturing aircraft in South Carolina in 2011 after a debilitating eight-week strike by 27,000 unionized workers in Washington state a few years earlier.  Analysts speculate Boeing placed the production of the 787-10 Dreamliner aircraft in South Carolina to reduce the leverage of the work force in Washington state.

This past week, U.S. Defense Secretary James Mattis demanded that the North Atlantic Treaty Organization’s (“NATO”) allies increase their defense spending by the end of 2017 to at least 2% of their gross domestic product (“GDP”).  Mattis stated that the Trump administration would “moderate its commitment” to countries that have not increased spending by year end.  The U.S. currently spends more on defense spending than all other countries combined (~3.6% of the U.S. GDP) and the Trump administration aims to have more sharing of military costs among NATO allies.  NATO Secretary-General Jens Stoltenberg believes the consensus among allies is to comply with Mattis’ ultimatum.  Despite President Trump’s recent praises of Russia, Trump and Mattis reassured Stoltenberg that the U.S. is still committed to supporting NATO and its allies.

Government Technology Solutions Update

The National Institutes of Health Information Technology Acquisition and Assessment Center (“NITAAC”) has been working to make the CIO-CS contract a much more attractive vehicle for prospective Federal agencies which may be seeking to procure cloud computing services.  Throughout the past year, NITAAC has used two main mechanisms in order to make this happen.  NITAAC first lowered the CIO-CS contract access fees, from 0.5% to 0.35%. More recently, at the end of January, NITAAC released a statement saying that they would be lowering the cap on the access fee for the CIO-CS contract to $70,000, as long as it was for an order with a base or option period ceiling greater than $20 million.  The organization has also been working with the industry and cloud service providers to create a more streamlined procurement process by asking providers how their services could best be used to service various agencies across the Federal government.  These efforts have started to pay off, with the Department of Veterans Affairs (“VA”) using CIO-CS to issue its Enterprise Cloud Services for IT Infrastructure Modernization contracts. According to industry insiders, NITAAC hopes that, with cheaper and more streamlined ways to access CIO-CS, an increased number of government agencies will make it their vehicle of choice for major cloud service acquisitions.

According to recent reports, several Federal agencies have already begun work on transitioning their IT and telecom infrastructure solutions from the legacy Networx vehicle to the new $50 billion Enterprise Infrastructure Solutions (“EIS”) vehicle.  Leading the way in this transition is the United States Department of Agriculture (“USDA”), who began the transition process back in 2014.  According to Federal guidelines, agencies have until March of 2020 to make the shift from Networx to EIS.  The General Services Administration expects that awards on EIS will be made soon, sometime in the spring of 2017.  According to industry insiders, other Federal agencies, such as the Department of Justice (“DoJ”), have been issuing requests for information to figure out how various vendors could potentially meet their needs.  As they gather more information, agencies such as the USDA and the DoJ will be getting a clearer picture on how they can leverage EIS to modernize and find efficiencies in their IT and telecom networks, potentially fundamentally changing how they are able to perform their core functions in the future.

Big Movers

LMI Aerospace (up 51.8%) – Share prices were up this week after the Company announced it entered into a merger agreement to be acquired by Sonaca Group.

Zodiac Aerospace (down 6.2%) – Share prices were down this week after an activist hedge fund voiced its opposition to Safran’s acquisition of Zodiac Aerospace.

Transactions

Convergence Technology Consulting, LLC has acquired Deep Run Security Services, LLC, a provider of cyber security services, cyber risk management, cyber due diligence for mergers and acquisitions (“M&A”), and other consulting services.  Terms of the deal were not disclosed.

Sonaca S.A. has agreed to acquire LMI Aerospace, Inc., a provider of structural assemblies, kits, components, and engineering services to the commercial, business, regional, and military aerospace markets.  The deal is worth an estimated $191.0 million. 

Verizon Communications Inc. has acquired Skyward, a provider of a drone management platform that help industries use drones to plan their flights, avoid restricted airspace, and register aircraft with the Federal Aviation Administration (“FAA”).  Terms of the deal were not disclosed.

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